Yesterday, I wrote a short about how pleased I was that decided to litigate a class action suit over its YieldPlus Fund---instead of laying down and letting the tort bar plunge for filthy lucre. Well, not everybody was as pleased as me. FBR Capital Markets this morning downgraded Schwab to market perform--while upgrading its earning estimates. Better to go with TD Ameritrade or E*Trade Financial shares, FBR says.
Here is a brief snippet from this morning'snote issued by FBR:
SCHW - Not Talking to Chuck, for Now; Lowering to Market Perform
"We downgrade SCHW to Market Perform from Outperform, and maintain our
$17 price target following the company's announcement that it is
terminating its previous settlement agreement related to its YieldPlus
fund. We believe the near-term positive catalysts for Schwab are more
limited now that the YieldPlus overhang has returned, potentially
resulting in a more meaningful earnings hit and impeding management's
capital flexibility. Also, the recent pullback in rates will create
higher fee waivers and further NIM compression going forward, while
management's recent decision to extend duration on its balance sheet
to support the NIM in the near term means that if/when rates do
eventually rise, the benefits will be delayed. At this point, we see
more attractive risk/reward in AMTD and ETFC shares."
The research note adds:
"Separate from the class action suit, we are aware of 68
arbitration cases that have gone before FINRA regarding YieldPlus.
Our analysis suggests Schwab was found liable or chose to settle
in 41 (60%) of the cases. In total, investors claimed $7.3 million
of damages and FINRA awarded claims and fees of $2.0 million, or
27% of the initial claim amount. However, 13 of the cases were
settled with terms held confidential. Excluding these cases, we
calculate that Schwab paid an average of 62% of the initial claim
amount on the cases in which the company was found liable. Given
the estimated $4.0 billion of principal losses experienced by
shareholders, coupled with the evidence that the majority of
arbitration cases found the company liable to some degree, we
believe the potential for a material charge exists. At a minimum,
this uncertainty will likely preclude the company from using its
capital to fund buybacks, accelerate the bank balance sheet
growth, or fund acquisitions."